After a brief summer hiatus, Axial returned to its roundtable series with five of its buy-side members to discuss how GPs are thinking about raising capital — both on a committed fund and deal-by-deal basis. Participants included Private Equity Funds, Independent Sponsors, and a Debt Fund, providing a well-rounded discussion covering all ends of the capital spectrum. Topics of discussion included the availability of capital, how GPs and LPs are adapting to the new digital normal, and how COVID will change the GP/LP relationship in the long term.
Thank you to the following Axial members who participated in the discussion:
Vladimir Andonov, Director, Martis Capital
Jason Block, Partner & CIO, Freedom 3 Capital
Ryan McGovern, Managing Director & Investment Committee Member, Star Mountain Capital
Bill Overbay, Managing Partner, Stone Road Capital
Pat Riley, Principal, Akoya Capital Partners
Introductions 00:00 – 4:30
Raising capital on a deal-by-deal basis – 4:30
- Stone Road Capital just wrapped up a transaction process that did not end up closing because of timing and uncertainty (around COVID)
- Things started on the deal in late fall, got held up around the holiday, and then dragged again because of COVID
- It was a complicated deal because the platform consisted of four acquisitions
- Was looking for one equity capital partner that could grow with the company
- Had narrowed it down to four equity partners who were ready to come to the table, but timing and uncertainty killed the deal
- There are some groups out there who are more willing to look beyond the short-term(ish) restrictions that come along with COVID, but you need to do work to find them
- It’s going to take a little bit longer and you’ll need to answer more questions from partners, but it can happen
New versus known deal partners – 10:47
- In this environment, it’s easier to work with people who you already know, so that can become the fallback for a lot of firms
- It’s comforting to know how someone behaves, what their expectations are, etc.
- On the other hand, due to the circumstances of COVID, you can’t necessarily rely on all of the same players you’re used to, and you may need to look outside of the box
- Stone Road is getting ready to start a process, and they’re building out an entirely new list of potential partners
- Freedom 3 is trying to bridge the gap right now — they’d like to involve new players, but sometimes Zoom leaves something to be desired, and you can’t get fully comfortable with the other parties
- Star Mountain and Stone Road Capital met at a previous Axial roundtable and have since begun conversations and feel very comfortable working with one another; they have yet to meet in person
Akoya Capital case study – 14:48
- Started working with the company in July 2019 – wanted to build a platform in the injection moulding space, so they were planning to do an add-on acquisition simultaneously
- Found the add-on in late fall of 2019, and started a combined fundraising and diligence process
- Slated to close the third week of March — were on the one-yard line
- Akoya, their equity partner, and the senior lender decided to pause for 60 days to see how both companies did
- During the pause period, the add-on did not perform well but the platform was performing extremely well
- Akoya decided to move forward with the platform and to pass on the add-on, and they closed the platform in mid-July (there was no change in the capital partner)
- The only major wrinkle was that the platform company took a PPP loan in the midst of all of this, and the business was concerned that the loan would not get forgiven if they went through with the transaction
- The way this was settled was that Akoya agreed to pay a percentage of the loan if for some reason it was not forgiven after the deal closed
The government as a new “capital partner” – 18:30
- Since COVID, the biggest capital partner for a lot of firms’ portfolio companies has been the government
- Figuring out how much is going to be owed back is going to be very interesting
- There was a lot of time spent on getting the money in the door, and also figuring out what’s to be owed
- There have also been many new transactions that have blown up because of concerns around government funding
- It’s not only because sellers were afraid of what would happen, but the buyers also have concerns about the implications that could come along with a closed deal
- If a company is claiming that it needs PPP to stay afloat, why should the buyer be paying a premium for that same business?
Raising committed pools of capital – 21:40
- Star Mountain recently closed their third direct investing fund — Ryan McGovern was days away from going to Switzerland to meet with some of the LPs in March, but Italy was in a lockdown, so he decided not to go (within a week, people in Switzerland were working from home as well)
- Probably lost a few new investors who they were not able to meet in person, but for folks who they already know and/or had done diligence already, they did not have a problem; had COVID happened 6-9 months earlier, there may have been a much bigger issue
- New investor relationships are definitely tough right now
- It’s really up to the LPs at this point on how they want to move forward and how important it is to them to deploy capital
- A lot of existing LPs along with new partners simply don’t know what their new process is yet
- It’s been a domino effect: portfolio companies had to adjust immediately and figure out how to adapt. Then, after GPs helped their portfolio companies, they had to take a look internally and figure out how to move forward and adjust their own processes. LPs have been able to watch all of this play out, and now they will need to figure out their new strategy and process in the next couple of months.
How are LPs adapting? 27:46
- In the pre-COVID world, whether it was a pension, endowment, university, or family office, it was fairly consistent that all LPs would require an in-person meeting with the GP, and there was a uniformity to the process
- In the post-COVID world, breaking that uniformity may become a differentiator
- Whoever can adapt the fastest and adopt things like Zoom and other new softwares will likely have a leg up
- A single family office likely has the ability to be more agile than a huge endowment fund, so will this become a major differentiator?
- Anecdotally, there’s no doubt that high-net-worth individuals and family offices have adapted to Zoom much more quickly and seem to be leading the charge
- Next, some of the more sophisticated mid-range players (ie: Insurance companies) are starting to get there, though they’re usually standing firm on the need to meet in person
- The biggest players — endowments and pensions — are not there yet.
What happens when COVID is “gone”? 32:48
- In the best case scenario, we won’t return to “normal” until 2021
- At that point, we will have had nine months of adapted behavior under our belts: Zoom adoption, digital diligence, etc.
- At that point, how much will people revert back to the old way of doing things?
- The pace at which people are diligencing companies is actually oftentimes faster here because of Zoom
- It’s extremely efficient to be able to see/meet 4-5 people in a single day versus over the course of weeks
- Cycle times could become shorter if the due diligence process remains frontloaded
- It seems as if people feel pretty good about the investment community adopting a lot of new technologies, and there is a hope that business owners follow suit (i.e: accounting) to continue to make the process even more efficient
- There would have been a lot more resistance if individual firms tried to make some of these shifts on their own
- It’s less about reducing the time that is committed to the process — if you’re truly interested in an investment, it’s worth the time — and it is more about reducing wasted time
Pricing, terms, risk-sharing (as related to fundraising) – 43:15
- Does there seem to be a difference in the way that LPs are thinking about how they want to participate in funds and/or deals?
- Conversations with LPs have been around risk
- LPs are trying to figure out what returns they should be targeting on risk, and what’s appropriate to ask the GPs to target
- The clearer that a GP is able to be on their expectations, the easier it is for LPs to form an opinion and make a decision
- There may be more of a tightening of the market in the coming months, but it hasn’t been hugely apparent to date
Raise money when you don’t need money – 48:40
- COVID has made it extremely apparent that you can’t rely on meeting someone in-person at a specific time
- It’s been brought to light now more than ever that you should take the opportunity to build relationships (over Zoom and in person) at every turn